For drinkers of craft beer, prices may soon be hopping

The costs of key ingredients are taking off

DAN RICHMA, Seattle Post-Intelligencer

By DAN RICHMAN, P-I REPORTER

Updated 10:00 pm, Tuesday, October 16, 2007

Rudyard "J." Kipling, head brewer/production manager, dumps a bag of malted barley into the mix that makes Hale's Mongoose India Pale Ale. The prices of hops and barley, two of the essential ingredients in brewing, continue to rise, as do the costs of shipping and bottling.
Photo: Scott Eklund/Seattle Post-Intelligencer

Rudyard "J." Kipling, head brewer/production manager, dumps a bag...

Brandon Ballard puts the final case of Hale's Pale Ale onto a pallet at the brewery in Ballard.
Photo: Scott Eklund/Seattle Post-Intelligencer

A flower called hops makes beer both flavorful and bitter. Those sensations make hops-heavy India pale ale, for example, a favorite drink from many of Washington's 83 small, independent, traditional breweries.

Also bitter: possible price increases from those craft breweries over the next few months.

Hops and malt, a form of barley essential to fermentation, are both in short supply nationwide. The shortage is caused by poor crops, high demand, the weak dollar and the increasing popularity of ethanol, which has prompted farmers to plant corn rather than hops or barley.

"Given the shortage of both ingredients, there's some potential for price increases," said Ray Daniels, a director at the Brewers Association, a trade organization for craft breweries. "In another two to three months, we'll have a better idea where everyone is."

The price increases could have significant effects, because Washington residents buy 10 percent of their beer from craft brewers, and most of those brewers sell much of their product in Washington. This state produces more craft beer than all but seven other states, says the association: 4.78 million gallons in 2006.

Price increases are less likely from larger commercial breweries, such as Anheuser-Busch, because they use less hops, some brewers said.

Hale's Ales Brewery in Seattle, known for its Mongoose India Pale Ale, next year could end up paying 75 percent more for its malt, and it's seeing prices for hops rise to $20 per pound from $3 per pound, said production manager Rudyard "J." Kipling on Tuesday.

"I've been doing this for 18 years with Hale's, and this is the first time we've seen this kind of jump," Kipling said. "Prices are crazy."

Contracts to buy both commodities in advance can lock in prices, and with production of 372,000 gallons per year, Hale's is big enough to have negotiated good contracts, he said. But signing a contract entails the risk of buying more than is needed, which could have its own costs.

"We have to be profitable, so we have to pass this sort of increase on," Kipling said. "I'm pretty convinced our prices will have to go up," possibly by between 50 cents and $1 per six-pack, he said.

A short-term contract on hops is protecting Seattle's Pike Brewing Co. against having to raise prices right now, said co-owner Charles Finkel. But his malt prices aren't locked in, and possible jumps in future hops prices have him worried.

"We are hop-heads in Washington!" he said.

Imparting tastes and aromas such as citrus, spicy or earthy, hops are a major contributor to a beer's distinctive taste. And thanks to a large dose of hops, Finkel's India pale ale measures 65 "bitterness units," compared with mass-market beer's 11 or 12.

With a vital commodity like hops available only in uncertain quantities, "people are saying India pale ales will go up exponentially in price," he said.

Pike Brewing raised the price of its six-packs recently, to about $10, which puts it among the most expensive craft beers. So it's not planning any further boosts for now.

"It seems obvious now that we did the right thing, because others will have no choice but to raise their prices," Finkel said.

"We have to pay tens of thousands of dollars right now for something we won't use until next year, and we're trying to figure out how to pay for it," he said. "Where there's an increase, everyone needs to find a way to pass it on. The impact could be higher beer prices, simple as that."

Hops are a worldwide market, with the Pacific Northwest growing virtually all those produced in the U.S. About 70 percent of that crop comes from the Yakima Valley, said Ralph Olson, owner of Hopunion LLC, a Yakima-based seller of specialty hops.

Worldwide hops acreage of 230,000 acres in 1994 shrank by 51 percent, to 113,000 acres, in 2006, because the crop sold for less than the cost of production, Olson said.

In 1978, he had 250 local growers. Now he has about 50, all of them much larger. Local farmers were lured to plant more lucrative crops, such as cherries, apples and grapes, or to sell their land to be built on.

The reduction also resulted from a glut of hops, which lowered the price. The supply shrank as growers withdrew, in Olson's view.

"Now all of a sudden everyone woke up and said, 'Oh, we need hops!' and all those (farmers) are gone," he said.

Malt, which brewers require in far greater quantities than hops, is the main ingredient in beer aside from water. Created by germinating and then roasting barley, it produces enzymes that help convert sugars into alcohol.

Europe's 2006 crop was ruined by heavy rains, while Australia's was cut by a severe drought and Canada's was "just average," Loucks said.

"The malt is available -- the problem is the price," he said. Barley prices are at all-time highs because of the short supply, he said.

Because ethanol is such a hot commodity today, "farmers are saying 'Screw the malt; we'll just grow corn,' " said Hopunion's Olson.

At the same time supplies of hops and malt are low, demand is at a record high. Imported and craft beers now account for 17 percent of beer consumed in the U.S., up from less than 1 percent in 1978, said Pike Brewing's Finkel.

"Supermarkets depend on craft beer for their profitability, and knowledgeable people depend on it for their gastronomy," he said.

The intricacies of commodity trading can be hard for brewers to understand, and that's frustrating to some of them.

"Sometimes the commodity sales people want to raise their prices so they can make more profit," Finkel said. "I've been told that hops are profitable and that they aren't, so I don't know who to listen to."

Brewing technology is wringing ever more flavor out of fewer hops, and breweries are experimenting with new recipes to compensate for lesser quantities of hops and malt. But meanwhile, even suppliers stand to lose if craft brewers' prices rise too high.

"I'm wrestling every day on how to keep hops coming in," said Olson. "It's an uphill battle, but I want some beer too, you know."